Restaurants face IRS ruling change on tips

An IRS ruling may change a long-standing practice in the restaurant industry when it takes effect Jan. 1, 2014. Gratuities that restaurants impose on large groups will no longer be considered tips after that date. Instead, restaurants must count them as wages.

The IRS has determined the gratuities do not meet the definition of tips because they are not paid voluntarily. For most waitstaff, the result will be higher taxes because the full gratuity will now be reported and taxed as a part of payroll.

Many restaurants are changing their policy in anticipation of the rule change. Some have changed their register software to display 15%, 18% or 20% gratuities on diners’ checks and leaving any additional amount to their discretion, effectively preserving the voluntary nature of the tip.

Note: Restaurants and those affected by the IRS ruling should adjust their policies and payroll programs before the change becomes effective.

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